Controversy over auditor rotation

November 12, 2013

A few months ago, I read in the newspaper that the AICPA convinced the House of Representatives to pass a law prohibiting the PCAOB and other American standard setting bodies from requiring auditor rotation.

That made me angry and so I shot off a blog entry that has caused quite a few comments – from both sides of the fence. One CPA offered to take me to lunch to discuss his views that rotation is a bad idea. I love that reaction! I always like a free lunch. But my angry blog entry was poorly written and all over the place. And I feel like I need to clean things up a little bit.

My beef with the AICPA centers on them bypassing a standard setting body to further their own questionable and shortsighted agenda. As a standard setting body themselves, they should understand the seriousness of their actions.

They are negating the impact and influence of the PCAOB by asking Congress to block the PCAOB’s standard regarding auditor rotation. The PCAOB was created because the AICPA did a poor job safeguarding the integrity of the auditing profession and the AICPA is again putting the integrity of the auditing profession on the line.

Are egos at play or is the AICPA motivated by what is ultimately best for the profession? Auditing is big business. The big accounting firms that essentially run the AICPA are not interested in tampering with their revenue streams.

The AICPA does not seem to value what auditors are actually selling or what an auditor’s true purpose is. An auditor is paid to evaluate an audit subject against a given criteria on behalf of the users of information. Auditors exist and have a job because those who create the information cannot be trusted to meet the criteria on their own. Self interest may drive the creators to skew the results or the creators may simply make a mistake that they can’t see.

I want to make it clear – as my first article did failed to do – that I am not convinced auditor rotation will guarantee auditor independence or make the audits any better. It is one of many ideas floating around out there to keep auditing a relevant profession. But I do know that it is not good that the AICPA wants to take it off the table as an option forever and ever in the United States by asking for a federal law prohibiting auditor rotation.

My daughter was listening to my voice mail along with me yesterday. A fellow CPA had left a message asking me to call him so we could chat about his views and why he supported auditor rotation. And my daughter asked me what the message was about.

So I said auditor rotation helps auditors remain objective. And then I asked her if she knew what objectivity was. No, she didn’t.

So I asked her to imagine being asked to choose the best dog among three dogs. And I asked her to imagine that one of the dogs was her beloved pug, Puggers. I asked her if she would choose Puggers as the best dog and she answered that of course she would. Then I told her she was not objective or detached from the choice. That I would not trust her to make that decision because I know that she loves Puggers. And she agreed that she would not be the best choice as a judge.

I said that auditors get paid to remain objective. And without that objectivity we can’t be trusted.

And then I went on to ask her that if she hung out with the dogs for a while – even if they weren’t her dogs – wouldn’t she get closer to one than the others? Might she develop an emotional attachment that would make it hard for her to make the judgment call? Wouldn’t it be a good idea to sometimes replace the judge with someone new who wasn’t attached or who didn’t love the dogs?

Yes, she agreed, rotating judges would be a good idea. And that, I concluded is what auditor rotation is about.

Auditor rotation is one idea among many

Those who oppose auditor rotation say that it is a waste of time. That the knowledge auditors gain after years of interacting with the entity is invaluable and shouldn’t be thrown away. Having been on a few audits for three or more years, I can see the truth in that statement. It does make auditing easier for the auditor because we know where to go and who to get information from. We also understand the political and economic dyamics of the organization better.

But could I assert that my knowledge really helped us focus on what was important more readily than someone who had only been on the audit for two years? No, I might argue exactly the opposite; that the longer you work with an entity the more you trust them and the less skeptical you become.

Auditor rotation is just one idea among many that should be weighed and debated. Some people have gone as far as to propose that the federal government should create a huge database of qualified audit firms and then assign auditors to audits. The auditors would not be paid by the audit client but from a pool of taxes collected for this purpose. They reason that the root cause of independence problem is that the client writes the check to the auditor. Am I crazy about this idea? No, because I do not want government to grow. But should we talk about it some more? Sure. Should the AICPA ask Congress act to prevent this or any other idea from being on the table as a topic of discussion? No.

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